assumption in short run
- price is fixed
- ie. firms are willing to supply any amount of goods
Consumption is a function of...
Why are G&T exogenous?
Governments do not behave with the same regularity as consumers or firms.
Macroeconomists must think about the implications of alternative spending and tax decisions of the government.
Difference btw GDP and total demand for goods
Inventory investment; because it is not consumed it is not part of the demand
*Components in GDP, eg. C and IM may offset each other and result in no net change in GDP
Autonomous spending is positive when...negative when...
- Government is running a balanced budget or having budget deficit;
- very large budget surplus
Formula of Z
*Any change in autonomous spending will change output by more than one for one
The multiplier effect/amplification effect comes from
- demand Z↑
- production Y↑
- hence Y↑>initial shift in demand
Interpreting the multiplier
The sum of all successive increase in production
How Long Does It Take for Output to Adjust?
assume production responds to demand instantaneously!
assume consumption responds to changes in disposable income instantaneously.
Deriving IS relationships
- no govt
- verify I=saving
- with govt
- private saving=Y-T-C
- public saving=T-G
- national saving=Y-C-G
- hence I=national saving
private saving equation
Equilibrium IS equation
I=-c0+(1-c1)(Y-T)+(T-G)(ie the public saving)
Explain how diseqm leads to inventory investment
Originally the firm produces 100 units and it is the equilibrium output, now it decides to produce 200 units, according to Z=c1Y+autonomous spending, change in demand equals c1(0.5)*100=50, total demand=150, 50 units becomes inventory investment
what is the paradox of saving
as people attempt to save more, the result is both a decline in output and unchanged saving IN THE SHORT RUN
mechanism behind paradox of saving-I=S perspective
- s=-c0+MPS(disposable income)
- when consumer wants to save more, c0 ↓
- 1)-c0 ↑, s ↑
- 2)consumption ↓, Z ↓, by eqm, Y↓, S↓
The government is not omnipotent because
- Changing government spending or taxes is not always easy .
- The responses of consumption, investment, imports, etc, are hard to assess with much certainty. Anticipations are likely to matter .
- Achieving a given level of output can come with unpleasant side effects. Budget deficits and public debt may have adverse implications in the long run.
mechanism behind paradox of saving-Y=Z perspective
- hence S=I+G-T
- consumer's decision to save more cannot affect I, G, T
- S does not change
how to calculate GDP deflator
nominal GDP/real GDP(specific base year)
calculate inflation rate
- Pt: GDP deflator of t
- P(t-1): GDP deflator of t-1
- inflation rate=Pt-Pt-1/Pt-1
under what condition will chained type GDP and fixed based year GDP give different numbers
- produce more than one good
- otherwise due to the different weights of goods, the estimate is not accurate
problems with fixed based year
- overest. growth of years after base year and underest growth of years before base year
- frequent revisions
how to calculate real GDP for 2001 in chained dollars
- matrix: base years dollars as column; years'productions as row
- use column results: production growth rate for both years
- avg production growth rate
- 2000 index:1; 2001 index=1+avg rate
- 2001 GDP in chained=nominal GDP in 2000*2001 index
how to calculate eqm output and demand
- Y, Yd, C, multiplier, autonomous spending
- output: mutliplier
- demand: C+I+G
why is tax called automatic stabilizer when T=t0+t1Y
- autonomous spending↑, Y↑, T↑, lessen the ↑in Y
- economy responds less to changes in autonomous spending than in the case where T is independent of Y
suppose t depends on Y, if autonomous spending ↓, why is balanced budget requirement destabilizing?
- Y↓ and T↓
- to balance budget, ↓G
- Y further ↓
suppose I=b0+b1Y, if b0 ↑, what is the ↑ in investment?
if investment is exogenous(given), saving is